a new politics of the common good
June 14, 2009 7:11 AM   Subscribe

Markets and Morals -- "without quite realising it, without ever deciding to do so, we drifted from having a market economy to being a market society" -- is the first of the 2009 Reith Lectures delivered by Michael Sandel. (previously) cf. Yglesias on free markets...

which kinda reminded me of clay shirky's LSE lecture (mp3; 43 mb; approx 93 minutes) esp the bit in the Q&A around 56.50 wrt money, motivation and ed deci :P

bonus!
posted by kliuless (77 comments total) 31 users marked this as a favorite

 
"Looking back over three decades of market triumphalism, the most fateful change was not an increase in the incidence of greed. It was the expansion of markets and of market values into spheres of life traditionally governed by non-market norms." Okay, so this market expansionism wasn't driven by greed, it was driven by the quest for developing profits or returns in new areas...which, by logical extension, means that this expansionism was in fact driven by greed (he can't claim that these acts were done in the public interest, because his entire argument rightly presupposes that the market works only to advance narrow private self-interest(s)). Quest for new sources of profit = greed.

Until Sandel will acknowledge that morality and capital markets are inherently antithetical concepts, he won't have anything useful to say. How is profit generated? Profit in the money economy is fundamentally exploitative, and therefore fundamentally immoral. Anyone who says otherwise is trying to sell you something.
posted by Lee Marvin at 8:12 AM on June 14, 2009 [2 favorites]


"without quite realising it, without ever deciding to do so, we drifted from having a market economy to being a market society"

Without ever deciding to do so?

Hasn't this been the standard macho social talking point of the extremists 'Republicans' like Rush Limbaugh for the past decade or so, leading to that disaster of a president?
posted by eye of newt at 8:20 AM on June 14, 2009 [2 favorites]


Hasn't this been the standard macho social talking point of the extremists 'Republicans' like Rush Limbaugh...

It's the standard talking point of EVERYBODY (in the US). There was a comment in MeTa the other day that users had no moral obligations to the site "because they paid their $5". This kind of thinking is completely rampant. See also the environment, sweatshops, etc, etc, etc.

Money is not a substitute for morality.
posted by DU at 8:26 AM on June 14, 2009 [14 favorites]


There is nothing whatsoever wrong with profit.

When a farmer sows seed in the field, he expects to reap a harvest. When someone works and invests blood sweat and tears in a business, he or she deserves to reap the rewards. I work for a small business. And they earn every dime they make ten times over.


Where morality comes in? One should not exploit one's employees, one should pay them on time, one should give honest value for the dollar, one should not cheat one's customers, etc. (By that measurement my employers are wonderful.)

But profit itself? Not wrong, not bad.
posted by St. Alia of the Bunnies at 8:37 AM on June 14, 2009 [5 favorites]


(Now if we are talking about the stock market, I might could get behind THAT as evil.)
posted by St. Alia of the Bunnies at 8:39 AM on June 14, 2009


"Looking back over three decades of market triumphalism, the most fateful change was not an increase in the incidence of greed. It was the expansion of markets and of market values into spheres of life traditionally governed by non-market norms." Okay, so this market expansionism wasn't driven by greed, it was driven by the quest for developing profits or returns in new areas...which, by logical extension, means that this expansionism was in fact driven by greed (he can't claim that these acts were done in the public interest, because his entire argument rightly presupposes that the market works only to advance narrow private self-interest(s)). Quest for new sources of profit = greed.

You're misreading him. He stated that greed did not change (incidence of greed did not increase). What changed was the expansion of market values. It seems clear that he views greed as the driving force of market functions, and a factor in the expansion.

Until Sandel will acknowledge that morality and capital markets are inherently antithetical concepts, he won't have anything useful to say. How is profit generated? Profit in the money economy is fundamentally exploitative, and therefore fundamentally immoral. Anyone who says otherwise is trying to sell you something.

Sandel is meeting you half way. His whole talk was on how market values taint other spheres in a way that he thinks society should reject.

I've not paid attention to Sandel in the past, but I liked the transcript of his talk. Is there some reason to be hostile towards his ideas?
posted by Nonce at 8:41 AM on June 14, 2009


This explains the Republicans, who have a whole cap-and-trade system on compassion. And nobody's buying permits for caring.
posted by adipocere at 9:04 AM on June 14, 2009 [5 favorites]


It's important to remember that Sandel's point isn't about the amount of greed inherent in the system, it's about whether or not greed (or other vices) can serve the public good. His early mention of Adam Smith is a reference to that claim, the idea that if properly organized, (some) vices can further the public good. This idea got a lot of play in early economic theory -- so early that I don't think the works are taught to economists anymore. Mandeville's "The Grumbling Hive" is an excellent example of the general argument supposed to connect vices to the public good:

"THEN leave Complaints: Fools only strive
To make a Great an honest Hive. [410]
T'enjoy the World's Conveniencies,
Be famed in War, yet live in Ease
Without great Vices, is a vain
Eutopia seated in the Brain.
Fraud, Luxury, and Pride must live; [415]
Whilst we the Benefits receive.
Hunger's a dreadful Plague no doubt,
Yet who digests or thrives without?
Do we not owe the Growth of Wine
To the dry, crooked, shabby Vine? [420]
Which, whist its shutes neglected stood,
Choak'd other Plants, and ran to Wood;
But blest us with his Noble Fruit;
As soon as it was tied, and cut:
So Vice is beneficial found, [425]
When it's by Justice lopt and bound;
Nay, where the People would be great,
As necessary to the State,
At Hunger is to make 'em eat.
Bare Vertue can't make Nations live [430]
In Splendour; they, that would revive
A Golden Age, must be as free,
For Acorns, as for Honesty."

Sandel is (I think) claiming that the cases he gives in his lecture are effectively counterexamples to the Mandevillian argument. Or at least he takes them to be counterexamples to such an argument applied globally -- he seems to still accept certain cases in which greed can be good, but denies that it should be used to incentivize activities that he takes to be intrinsic goods (e.g. children reading).
posted by voltairemodern at 9:07 AM on June 14, 2009 [7 favorites]


I hate to break this to everyone, but the GOP nor the Dems stand for whatever corporate lobbyists pay them to stand for.

However you feel about capitalism, this is NOT the same thing as a market economy, unless you're talking about the market where influence is bought and sold.
posted by ZenMasterThis at 9:12 AM on June 14, 2009 [1 favorite]


(oops, that should have said the "GOP and the Dems")
posted by ZenMasterThis at 9:13 AM on June 14, 2009


And they earn every dime they make ten times over.

By computing this ratio you've already parted ways with free-market thinking -- which holds that the dimes they've earned are, by definition, the dimes they've made. And the same goes for the stock speculators.
posted by escabeche at 9:24 AM on June 14, 2009 [2 favorites]


Nonce, points well taken; what I'm frustrated with is his distinction between greed and market values, which I see as ultimately a false one. "Market values" are just the ideological expression of the logic of greed.

St. Alia, what you're describing isn't profit (in terms of the hard work that you are quite rightfully compensated for), but simply the selling of part of your life as commodity labor-power (according to a Marxian economic view). Profit enters the production process when the employer/capitalist sells the commodity for more than it cost to make. This price is the "real value" of the commodity; as such, the laborer has been paid less for his/her labor than it is actually worth. This difference between the cost of the commodity to the capitalist and its real value is extracted by the employer as the "surplus value" of the commodity, or, in other words, as profit.

In today's economy, very few people can rightly be said to "profit" from the vast majority of the labor performed in this country, and most of those people are involved in the financial sector.

And I do apologize for my angry tone, I'm not normally this incensed; I've just reached a saturation point of frustration with hearing intelligent people try to eat their cake and have it to in discussing the current financial meltdown. That is, they clearly have to fault capitalism to some degree (here described by Sandel as an "over-expansion of market values"), but are unwilling to push the implicit admission of this line of thinking (i.e., that the "creative destruction" of capitalism is demonstrably not beneficent for the vast majority of the population) to its logical conclusion (that the fundamental logic of capitalism is antithetical to the prosperity of 99% of the population).
posted by Lee Marvin at 9:25 AM on June 14, 2009


Related, previously.
posted by a robot made out of meat at 9:30 AM on June 14, 2009


Profit and morality are not antithetical. They are pretty much orthogonal.

You can make money acting morally or immorally. You can also end up broke either way. (Particularly if your immorality lands you in prison.) While it may be regarded in some quarters as easier to make money immorally, I've never been entirely sure that's true, as opposed to simply confirmation bias when we make a big deal out of people who've made money immorally.

The whole "profit is fundamentally exploitative" line is total BS. Although coercive transactions certainly happen, they're not even even close to being the norm. The market economy would not function if it wasn't bringing about win/win situations at least a good percentage of the time.

Even if you feel like your job is a coerced transaction (you don't really have a choice because of lack of other opportunities or whatever), that's only one transaction in your day. There are probably hundreds or thousands of others that we engage in without thinking, and most of those are win/wins — we trade money for something, because at that time and place, the good we're buying is worth more to us than the asking price.

Although I think there are some serious problems with neo-classical economics and in extrapolating their simplistic models out to large scale, there is no real doubt in my mind that most transactions in the market economy do produce (in the short run, anyway) positive outcomes in terms of both parties getting what they want. It would not work as well as it does otherwise.
posted by Kadin2048 at 9:32 AM on June 14, 2009 [4 favorites]


"most transactions in the market economy do produce (in the short run, anyway) positive outcomes..."

In addition to "the short run," one might add, "and for each individual, as well." Yet considered in aggregate, and over the long-term, the concentration and centralization of capital is a very destructive force. It's not just coincidence that we're in the biggest economic mess since the Great Depression AND we also have the highest stratification of wealth since 1929.
posted by Lee Marvin at 9:51 AM on June 14, 2009 [2 favorites]


Until Sandel will acknowledge that morality and capital markets are inherently antithetical concepts, he won't have anything useful to say.

It really is pointless to argue points of morality. Period. At their root, morals tend to come from gods and/or religiosity and nobody ever really wins a religious argument, do they?

Ethics on the other hand might just be quantifiable. So allow me to rephrase:

Until Sandel will acknowledge that ethics and capital markets are inherently antithetical concepts, he won't have anything useful to say.

Hey, wait a second, that's a little on the hyperbolic side, don't you think?
posted by philip-random at 10:19 AM on June 14, 2009


Profit is immoral precisely because the people who create wealth are paid less than they create, and necessarily (for capitalism) so; if you as an employer paid your employees what they're worth, rather than what you can get away with, you wouldn't make any profit. In order for there to be an employer-employee relationship, there has to be exploitation (i.e. the extraction of surplus wealth in the form of paying a wage that is lower than the wealth created), or else there's no point in being an employer.

There can be employment without exploitation- plenty of examples exist in firms where ownership of a firm is divided amongst those who work at it. Not only is this not exploitative, it's highly motivating- rather than getting the same amount of money no matter how well the firm does, when you are an owner of the company, you work a lot harder for it.

Now, as to whether market exchange can possibly exist without exploitation, well, that's another question entirely. (I would say no, because imbalances in the size and market position of two parties creates power differentials in trading, and there's no such thing as truly equal parties outside of economics textbooks.)
posted by Pope Guilty at 10:25 AM on June 14, 2009 [11 favorites]


Profit in the money economy is fundamentally exploitative, and therefore fundamentally immoral.
Profit is the incentive for taking financial risk. Why should an individual or entity take a financial risk if there was no financial benefit at some future date?

Historically, without the ability to recover profit, there has been stagnation. This was proven to be true by 20th century non-market based economies. There may be viable non-market based economic models that avoid that pitfall, but I'm not aware of any. What has worked out is that non-market based economies could integrate innovations from market based economies. And to me that is a mode worth looking at more closely.

Some things should not be market driven (prison systems, health care, education, security). Those things should be judged successful on other metrics other than how much money can be made. I'm pretty much a free market guy, but even I can see that there are limits. However, those systems should be able to integrate goods, services and processes from the free market. That way innovations and efficiencies can be integrated into those systems that lack the ability to do that internally.

The free market has a place, and it's not inherently evil. Likewise, the free market can not solve all economical/social needs.posted by forforf at 10:30 AM on June 14, 2009 [5 favorites]


There's also the fact that for all the economist-speak about "negotiating wages", that is not a reality for the vast majority of employed people. If your boss doesn't think s/he needs you specifically, your wage is what the boss says your wage is.
posted by Pope Guilty at 10:32 AM on June 14, 2009 [2 favorites]


It's a bit simplistic to say that just because someone's labor creates a good that is worth more than the cost of their labor, then that person has been exploited. There are non-monetary tradeoffs that employees receive, including limited responsibility (this can be a plus) and limited liability (this can be a huge plus). The employee's investment can be tiny compared to the costs of establishing the company's infrastructure (a skilled worker may have spent a few thousand dollars to go to a trade school for a few years; the factory s/he works in might cost millions). It is common for small businesses to be operated by an owner who works for a wage that is laughable if the hours they work are taken into account. And if the Widget boom goes bust and the warehouse is full of useless Widgets that can't be sold (turning a profit into a loss), the employee still gets paid for the labor they did.

The exploitative part stems from the priveleges given to corporations that make them monolitic entities with whom workers cannot engage in actual negotiation or dialogue. A healthy, well-regulated market will allow a space for workers to have a voice through unions, or provide that voice for workers when they would not otherwise have it through minimum wage, overtime enforcement, mandating safe working conditions, etc.
posted by Nonce at 10:48 AM on June 14, 2009 [9 favorites]


When hopes fade, they really take off, because people evangelize them to support their denial. The ideas they are based on cease to make sense and instead become goals and visions, where the glorious ends justify any means. The real question is why don't people just give these notions up or modify them based on results? The best answer is that they were sold on anticipation of the idea's success. They were sold on a future return, and their disappointment was never truly realized. They have no need to admit defeat because they never once prospered from the dream. Ditto for capitalist societies, and not just for religions.
posted by Brian B. at 10:59 AM on June 14, 2009 [1 favorite]


There is nothing whatsoever wrong with profit.

Another word for profit is economic rent.

Profit exists at all due to imperfect competition; in a perfect economy everyone's profit margins are zero since profit is inversely proportional to the amount of competition.

Coca Cola booked $7.5B in profit on $32B in sales last year, but I don't have a problem with that since Coke is a completely optional lifestyle good and people are free to not buy Coke if the price is too high.

Where profit becomes rent-seeking in necessary goods and services is where I have a moral problem with it. In the CFC thread below we see how changing the propellant in asthma medicine has enabled Big Pharma to extend their patent protections and triple their revenue on their inhaler products.

GSK made $9B on $36B in sales last year, and that's counting $11B in their overhead -- over half of what we pay for pharmaceuticals is either overhead or profit. Anybody defending Big Pharma's profit margins is an rightwing freemarket fundamentalist ideologue or has a screw loose, but I repeat myself.

AT&T made $23B on $124B in sales and its buddy in crime, Verizon, made $10B on $100B in sales.

Earlier this decade I found a simple separator between the (good) capitalist profiteering motive and the (bad) rentierism mode -- good capitalists profit from their labor and productive enterprise of bringing new goods to market while bad rentiers profit from the purchase of extant natural resources or other legal privileges like patents and the income-collection appurtenant thereto.

So even with their respective anti-competitive market share domination a Coca Cola or Apple is not a necesssarily a bad capitalist, just a successful one, while AT&T and Verizon with their buying of the electromagnetic spectrum and Big Oil with their acquired rights to sell our own oil to us at relatively low royalty rates on the first analysis are rent-seeking bastards and our economy overall would be better off without them in their current structure and shareholder profit margins.

The problem with allowing rent-seeking to go unchecked is that the economy becomes distorted with rent-seekers preying off the actually productive members of society. We last saw this with the great number of advanced math degree holders being sucked into the Wall Street blackbox trading quant games this decade.
posted by @troy at 11:02 AM on June 14, 2009 [19 favorites]


The limitations of the free market are not a new discovery. Those of a free market bent who like to quote Adam Smith tend to conveniently forget the latter parts of the Wealth of Nations, where he specifically addresses the consequences of the free market:

In the progress of the division of labour, the employment of the far greater part of those who live by labour, that is, of the great body of the people, comes to be confined to a few very simple operations, frequently to one or two. But the understandings of the greater part of men are necessarily formed by their ordinary employments. The man whose whole life is spent in performing a few simple operations, of which the effects are perhaps always the same, or very nearly the same, has no occasion to exert his understanding or to exercise his invention in finding out expedients for removing difficulties which never occur. He naturally loses, therefore, the habit of such exertion, and generally becomes as stupid and ignorant as it is possible for a human creature to become...in every improved and civilised society this is the state into which the labouring poor, that is, the great body of the people, must necessarily fall, unless government takes some pains to prevent it.

As a society, people need to make a decision about the desirable uses of the wealth that their society has created. Typically items such as eduction, health, social welfare etc feature on the list of the desires of the majority of the people, but not on the list of the majority of the money. Allowing the monetisation of these spheres serves only to dilute the purpose of the activities in subjugation of the profit motive.
posted by Jakey at 11:04 AM on June 14, 2009 [4 favorites]


The free market is a myth, a pure, idealized site of competition that exists only in rhetoric, and nowhere in practical reality. If profit is the incentive for taking financial risk, then why aren't millions of Americans profiting handsomely by the financial risks they were forced to take in the housing and credit markets? Less glibly, the ability to take financial risks is not equitably distributed, nor can it be, for the very nature of profit is that some lose so that others may gain. Wealth is a zero-sum game, the inequitable distribution of finite resources.

Nonce, profit is what is extracted over and above the sunk costs of infrastructure, liability, and the like; this is typically spread to stockholders in the form of dividends (and to senior executives, by way of stocks and massive monetary compensation), although with the rise of private equity firms, most of this profit is going directly to those in charge of the private equity firms (and those in charge of the financial institutions that usually bankroll these private equity groups).
posted by Lee Marvin at 11:07 AM on June 14, 2009


Brief digression: "At their root, morals tend to come from gods and/or religiosity. . . "

philip-random, I think you have this backwards: cultures develop gods and religion as a means of creating a narrative for the propagation of morals. The moral codes are guidelines for structuring individual behavior with the goal being the general well-being of the group. The religion/theology is the transmission system. Therefore I think it is fair and valuable to examine to what degree things like economic systems (here, market-driven models) conflict and/or aid the moral program. Or some such . . .


( . . . more coffee . . . )
posted by barrett caulk at 11:09 AM on June 14, 2009 [4 favorites]


This price is the "real value" of the commodity; as such, the laborer has been paid less for his/her labor than it is actually worth.

The record business is an interesting example.

Clearly the right to listen to a great album of songs is worth $20 or more to most people (which is just pennies per listen over the lifetime of the product), yet the artists involved generally see very little of this money, and the value-add the record companies perform for the lion's share of the profits is dubious.

But Apple's iTunes Music Store (and the AppStore now, too) is a revolutionary game-changer since it inverts this profit distribution -- from each sale the goods maker is receiving ~40%, while the distributor (Apple) is getting ~20% gross of which perhaps half go to distribution costs. The government takes the remaining 40% or so from each sale, depending on the creator's tax bracket.

The bottom line is that any market economy is both a race to the bottom in its natural state and a cutthroat competition for rent-yielding assets like real estate and patent protections since collecting rents is much more preferable to actually working for a living.
posted by @troy at 11:19 AM on June 14, 2009 [1 favorite]


Profit and morality are not antithetical. They are pretty much orthogonal.

You're saying that the morality of an act has no baring on it's profitability? I find that hard to belive. An insurance company who is overzealous in denying medical insurance claims, and thus causing death and hardship for it's clients who thought they were covered will be more profitable, and less moral then one that does.

On the other hand you could say that if they do it too much, then people will realize they're worthless and move to another company, in which case their profits would decline. Either way, there is certainly a relationship, and a non-linear one as well.
posted by delmoi at 11:28 AM on June 14, 2009 [1 favorite]


Nonce, profit is what is extracted over and above the sunk costs of infrastructure, liability, and the like; this is typically spread to stockholders in the form of dividends (and to senior executives, by way of stocks and massive monetary compensation), although with the rise of private equity firms, most of this profit is going directly to those in charge of the private equity firms (and those in charge of the financial institutions that usually bankroll these private equity groups).

I'm aware? Perhaps my previous comment was poorly written. I was trying to point out the difference in scale of what the two sides (employee and employer) often bring to the table, and how these non-tangibles benefit employees in a way that offsets (if only partially) their "exploitation."

I also went on to greatly hedge the statement by pointing to the idea of a well-regulated market which creates a voice for laborers.

Also, as others have mentioned, well-regulated markets also trend profits down over time, which reduces any exploitation and increases the worth of the non-tangibles to the employee.
posted by Nonce at 11:31 AM on June 14, 2009


then why aren't millions of Americans profiting handsomely by the financial risks they were forced to take in the housing and credit markets?

It was a crowded trade, at the end at least, but plenty of money was made 2002-2007 however -- trillions of dollars.

Less glibly, the ability to take financial risks is not equitably distributed, nor can it be, for the very nature of profit is that some lose so that others may gain. Wealth is a zero-sum game, the inequitable distribution of finite resources

Here I disagree since wealth is neither fixed in supply or production. Wealth in my book is simply that which provides services that satisfy human needs and wants. So it is possible to "make the pie higher" -- in the immortal words of a thankfully former President -- with the institution of wealth-friendly economic policies. Singapore is a recent good example of this.

Unfortunately, disappointingly little of our present economy is focused on useful wealth creation.

We spend something approaching a trillion a year on warmaking, hundreds of billions on the criminal justice system (which, like Defense, is only at best wealth-preserving), and about 20% of GDP on ground rents, the privilege to exclusively use a volume of space on this planet.
posted by @troy at 11:39 AM on June 14, 2009 [1 favorite]


On the other hand you could say that if they do it too much, then people will realize they're worthless and move to another company, in which case their profits would decline.

Which is precisely the reason that the health insurance companies are so scared of a public option in health care reform. They can't continue to collect rent on our bodies if we actually had a choice in the matter.
posted by vibrotronica at 11:41 AM on June 14, 2009 [1 favorite]


Also the article isn't really about whether or not profit is theoretically a good thing or not, but whether the sort of 'artifical' markets created in the past few decades are really good things. The republicans had a theory that "the free market solves everything" but the thing is, when you're talking about a government service, paid for by taxes, the only thing you're doing is forking over tax dollars to the buddies of politicians. That's why you saw things like the crazy corruption in Iraq with the contractors.
posted by delmoi at 11:42 AM on June 14, 2009


Net Income is not equal to economic profit. Please remember that when you say things like

AT&T made $23B on $124B in sales and its buddy in crime, Verizon, made $10B on $100B in sales..

Economic Profit means the company has earned more from operating its business then it could have earned investing in something else.
Profit margins are meaningless without considering how much investment was required to build the business. The best example of this is something like a T&D utility that is regulated to be a breakeven economic profit entity. They might have margins in the 30%-40% range but are not generating an economic profit.
In the case of AT&T it also took then 265B in assets to generate that 23 Bil in Income. Verizon had 200B in assets. Neither one of those companies is making an economic profit. (especially when you consider what the actual investments in those businesses that have been written off already).

The same line of thought is also why saying any company that makes money above their labor costs is exploiting labor doesn't make any sense. Labor is not the only factor in a business.
posted by JPD at 11:42 AM on June 14, 2009


Which is precisely the reason that the health insurance companies are so scared of a public option in health care reform. They can't continue to collect rent on our bodies if we actually had a choice in the matter.

Right and there's an equilibrium issue as well. As long as all the companies are doing it, then they can each push the envelope lower and lower.
posted by delmoi at 11:43 AM on June 14, 2009


Thanks for the link to the lectures, though any resemblance to Clay Shirk is purely Shirky's sincerest form of flattery.

I don't anticipate this thread will go very well, given the performance thus far: read the fucking article, people.

Still, there's always hope. Some market values questions: Should there be a market for adoption (a baby market)? Should there be a market for surrogate motherhood? Why one and not the other? Why not an organ market? Should cost of care figure into the use or non-use of potentially life-saving treatments? If I can't sell my organs (and the state can't sell my organs) why can the state sell the right to pollute in my neighborhood, exposing my organs to increased risks?
posted by anotherpanacea at 11:46 AM on June 14, 2009 [2 favorites]


As usual, freebird nails it.
posted by lalochezia at 12:00 PM on June 14, 2009 [1 favorite]


In the case of AT&T it also took then 265B in assets to generate that 23 Bil in Income. Verizon had 200B in assets. Neither one of those companies is making an economic profit. (especially when you consider what the actual investments in those businesses that have been written off already).

My objection to AT&T and Verizon is that they routinely bid up the barriers to entry to artificially limit competition (cf the late spectrum auctions). The actual technology cost backing our $100/mo phone bills is pennies. The rest is rent-seeking and overhead.

Any congestion charges on EM spectrum overuse should go to the government as keeper of the commons, not the private sector as exploiter of its license to profit.
posted by @troy at 12:17 PM on June 14, 2009


If profit is the incentive for taking financial risk, then why aren't millions of Americans profiting handsomely by the financial risks they were forced to take in the housing and credit markets?
I bolded the important parts of your question. Profit is not guaranteed to an investor, it is a calculated gamble, a risk. Thus, profiting from an investment is not guaranteed. Some did profit, others did not, some profited and then lost that profit, others, managed to keep profit. Also, buying a home or buying credit are not the best examples of market ventures. The primary reason for buying a home should not be that it will make you money in the future. Buying credit should not be done to try and play market rates against each other as a means to a profit (buying credit does make sense if the credit is to be used to invest in something that is a productive venture).
Also, and quite importantly, in a free market, no one should be forced to buy or sell anything against their will.

If your argument is that the current economic system is out of balance. I wholeheartedly agree with you. If your argument is that the reason our economic system is out of balance because free market capitalism is inherently and always evil, then I strongly disagree with you.
posted by forforf at 12:24 PM on June 14, 2009 [2 favorites]


Anotherpanacea, I think you make an excellent point insofar as once some part of the chain is commodified (say, emissions trading), the rest of the chain suddenly becomes tacitly (albeit not tangibly) valuated, as well. All elements of the equation--including moral and political questions--are held hostage to the instrumentalized logic which has been introduced into the ecosystem. Sandel rightfully acknowledges that it's a fool's errand to try and fix bad capitalism with more capitalism, but he doesn't really suggest how, in areas where capitalism clearly has no place, the capitalist genie can be put back into the bottle.

I think the reason for this is that, as a culture, we do have lots of moral beliefs about the capitalist system itself--specifically, that it's bad to de-commodify any sector of the economy, as this will, so the thinking goes, inevitably depress the wealth, health, and prosperity of the economic system as a whole. So the rhetoric surrounding the health care reform today is not about re-imagining the insurance system as a public trust and inviolable, non-commodified right, but, rather, to introduce a "public option" that will, through its costs of scale and massive leveraging, force the private insurers to become more "efficient." That is, the very notion of a public trust is being commodified and promoted as a means of fixing bad capitalism with more capitalism. Any suggestion that the private health care industry is, in fact, a ginormous malignant tumor growing on top of our economy is treated as an immoral position, even if this attitude might be better for us in the long-term. James Galbraith made a similar argument about the financial sector in his recent book "Predator State" (that it's a sort of unsustainable malignant growth on our socio-economic structure), but there is, again a dominant morality/ideology today that says this is sour grapes, that advocating for the radical diminution of the financial sector is anti-American, because it's punishing people for being successful.

My point is; issues of politics, morality, and economics are always going to be intertwined under any capitalist system. It does no one any good (except the captains of industry) to pretend as if the political and moral ideologies are somehow timeless and immutable, and not themselves inflected by the historically situated capitalist ideologies. So, how then can one expect to have a dispassionate position on moral or economic issues, one that isn't reifying capitalist ideologies? In today's world, there's no way to briefly step "outside" the instrumentalizing capitalist worldview, which is why I believe that the capitalist worldview itself is what has to be abandoned, not our commitment to universal ideals of morality and ethics.
posted by Lee Marvin at 12:25 PM on June 14, 2009 [4 favorites]


Profit is immoral precisely because the people who create wealth are paid less than they create, and necessarily (for capitalism) so; if you as an employer paid your employees what they're worth, rather than what you can get away with, you wouldn't make any profit.

so employers don't create wealth? they don't perform work? while there are certainly many exploitative situations in today's society, i don't see it as a given that just because a company makes a profit that they're doing so exploitatively
posted by pyramid termite at 12:25 PM on June 14, 2009


Capitalism works just fine with solid governmental oversight, in the same way that democracy works just fine when you have a real balance of power and popular participation. Declaring that the catastrophic failure of a deregulated market shows that capitalism in all cases is garbage seems as unreasonable as declaring that democracy is always and ever a waste of time because it doesn't function when, for example, one party has all the guns and the people are too scared to vote.
Neither capitalism nor democracy are magic. Both require certain social structures, external to themselves, to function effectively, and if those structures are available they can offer freedoms and benefits which no other system can. Absent those structures they simply don't work. Which is why pure free market fundamentalism is garbage.
posted by AdamCSnider at 1:29 PM on June 14, 2009 [3 favorites]


philip-random, I think you have this backwards: cultures develop gods and religion as a means of creating a narrative for the propagation of morals. The moral codes are guidelines for structuring individual behavior with the goal being the general well-being of the group. The religion/theology is the transmission system.

Ummm ... this is an awfully reasoned and rational and agnostic clarification of the point. As someone who generally defines himself as just that, agnostic, I couldn't agree more. But I don't think I'd ever say as much to a true believer ... certainly not with any hopes of the ensuing conversation accomplishing anything.

Now, what were we talking about?
posted by philip-random at 1:31 PM on June 14, 2009


My objection to AT&T and Verizon is that they routinely bid up the barriers to entry to artificially limit competition (cf the late spectrum auctions). The actual technology cost backing our $100/mo phone bills is pennies. The rest is rent-seeking and overhead.

I think you are conflating marginal cost vs average cost. Average cost is the issue - you need to impute a capital charge for the prior investment. Any industry that is all fixed costs, minimal variable cost ends up being an industry that doesn't earn an economic profit - see deregulated power utilities as the most obvious example.

But that is neither here nor there - the reality is that these companies don't earn an economic profit.
posted by JPD at 2:00 PM on June 14, 2009


To rephrase you may very well be right about the spectrum issues, and certainly that would be an argument for better regulation (which I am all in favor of) but the reality is that even if they are doing this, they still don't have enough market power to benefit from the oligopoly and generate economic profits.
posted by JPD at 2:03 PM on June 14, 2009


"To rephrase you may very well be right about the spectrum issues, and certainly that would be an argument for better regulation (which I am all in favor of) but the reality is that even if they are doing this, they still don't have enough market power to benefit from the oligopoly and generate economic profits."

Actually, the telcos have done very well with the deregulation scheme they designed. They have far fewer obligations to the customer or to allow real competition over the infrastructure we helped pay for.

Right now the FCC is still reeling from eight years of Bush and his anti-regulation dogma. They were always bureaucratic and inefficient, but regulatory bodies usually are. From the time of Reagan until now they've become just another puppet for the business, and public assets they're supposed to be regulating are squandered. But Bush was really bad for regulatory bodies which by their nature need the careful, clinical deliberation bureaucracy can offer, like the FCC. The playing field has been warped beyond recognition. One of the few bright spots of this recession or depression is that things have an opportunity to be dealt with in a serious manner. But there is also a tendency to sell everything out in the name of improving business and paying down government debt, which at best is a short-term gain and a long-term loss for the public.
posted by krinklyfig at 2:33 PM on June 14, 2009


I don't doubt what you are saying but the reality is they don't generate an economic profit. They are terrible businesses that are worth less then the book value of their assets. Even if they as you said have manipulated the deregulation process.

You didn't help pay for the infrastructure. You paid a fee for service. The investors paid for the infrastructure.

I've never seen a good proposal for the total unbundling of telecom services - the economics of it as a competitive industry are just too poor for companies to survive over the long term.
posted by JPD at 2:46 PM on June 14, 2009


You didn't help pay for the infrastructure. You paid a fee for service. The investors paid for the infrastructure.

Not really up on the history of telecommunications infrastructure in the US, huh? Might want to think about that when posting about it.
posted by Pope Guilty at 2:51 PM on June 14, 2009 [2 favorites]


But that is neither here nor there - the reality is that these companies don't earn an economic profit.

Yet their very existence is pulling $100/mo out of my pocket, putting them in the top 5 of rent-seekers with grubby hands in my wallet.

Whether this is economic profit or just paying the debt service it took to acquire these spectrum licenses is not relevant to my point, they are serving as -- and profit by being -- private gatekeepers of the public commons of EM spectrum.

Clearly the value of this service is $100/mo -- $3/day -- for telecommunications. Yet this is perceived value that is totally divorced from actual running costs.

IMHO in a more rational economic scheme telecom companies would be investing in, and profiting from, hard capital infrastructure and not up-front absolute private property rights in what was the public's EM spectrum.

The present situation is severely stifling technological innovation in the wireless space and is also making everyone poorer with the limited cartel of big players in the space. It is a textbook case of rentierism and, while not quite the dreaded "market failure", speaking as a tech guy is very frustrating to see unfold as it has.

I'm just thankful I was able to swing a $80/year pay-go deal with an MVNO when they were offering the deal. I intend to hold onto this account for life, LOL.
posted by @troy at 3:02 PM on June 14, 2009


these companies don't earn an economic profit.

Why were/are there investors, then? Are you saying that they're investing as quasi-philanthropy, or that the investors (and, potentially, management) have made and are making sub-optimal decisions? In either case, would such considerations make them more deserving of business revenue than a worker?

You didn't help pay for the infrastructure. You paid a fee for service. The investors paid for the infrastructure.

Again, is this philanthropy, or are the investors (even if they've made decisions which don't give them an economic profit) getting paid back or perhaps even making at least an accounting profit from the presumably fee-derived revenues? If so, it's certainly arguable that the customer has played a role in repayment of the infrastructure investment.

(Not to say that the point about economic profit isn't a good one to weigh against the general idea that profit constitutes worker exploitation.)
posted by weston at 3:14 PM on June 14, 2009


So basically what the Catholic Church has been saying for like... ever?
posted by valkyryn at 3:19 PM on June 14, 2009


Lots of new books out there focusing on the current economic situation; I'll recommend this one, by William Greider: Come Home America: The Rise and Fall (and Redeeming Promise) of Our Country. During the Regan years he wrote Secrets of the Temple: How the Federal Reserve Runs the Country.
posted by acro at 3:31 PM on June 14, 2009


I would like to get a cheek swab from Lee Marvin and clone him and distribute him nationwide to spread his gospel (well, it's not exactly "good news" when I think about it). Anyone care to split development costs?
posted by hippybear at 3:55 PM on June 14, 2009


then why aren't millions of Americans profiting handsomely by the financial risks they were forced to take in the housing and credit markets?

Millions of Americans surely did, just like millions ended up better off from the dotcom bubble. If you cashed out at the right time, you made money. If you didn't, you didn't. Of course, you were relying on Greater Fool theory, but many people did actually do quite well out of it.

So basically what the Catholic Church has been saying for like... ever?

Well, until it gave up on prohibitions on usury and focused on diddling Irish orphans.
posted by rodgerd at 3:57 PM on June 14, 2009


Here's an idea I have been working on (with minimal economic knowledge; in fact, I have disregarded all economic theories to come up with this - you have been warned):

Profit can be "virtuous" when it creates a Win-Win Situation. You sell whatever for more than it cost you to make, but for less than it is worth to the buyer. Not what the market will bear but what the market can itself "profit" from.

Calculating what constitutes "less than the worth to the buyer" is where it gets sticky. In Retail, is it as simple as the buyer believing he/she made a good deal? You set a price on something you want. You go to ebay and bid less than that and win the item. Profit! By that measure, the "Always Lower Prices" at WalMart would be downright virtuous, except for two factors: (1) for the poorest customers, there is no profitable price point for necessities they can not afford (which represents only some of the customers, but what percentage?) and (2) WalMart's reputation for super-aggressive negotiating with its suppliers to ensure its profit while the some suppliers sell at a loss just to keep market share.

And then there's what WalMart and other corporations pay their employees. If you treat Labor as a commodity that is sold, when does the Laborer make a profit? When he/she has surplus income to 'put in the bank', maybe, but the deterioration of a human's ability to work with age makes 'saving for retirement' a real cost that's usually undercalculated, not to mention non-current medical expenses (which is how Medicine got dragged into the Insurance Industry, where I believe "Win-Win" is virtually impossible).

I've had times of my life where I can definitely say that I was happily overpaid; they just are far overbalanced by my time underpaid, unemployed or disabled when my Fixed Cost of staying alive sometimes skyrocketed. And I've spent most of my working life as an Indirect Cost of doing business, not an actual Profit Center; the real value of my Labor to my Employer was anything but clear.

With all the difficulties (impossibilities?) in measuring the profit on one side of the deal (and sometimes both), the concept of "Win-Win" should still be a very important part of what constitutes a True Profit, or rather, True Economic Growth, a real increase in wealth. Sure. Increase in True Wealth = what the seller profits + what the buyer profits. If the seller screws the buyer (or much more rarely, vice versa), its profit does NOT add to True Wealth. And that, to me, is a primary reason our economy isn't working. Add the cost of debt to what a buyer pays for anything today (and one of my economic heresies is that I believe debt and interest should be treated as part of the Cost of Living), and we haven't "grown the economy" for decades.
posted by wendell at 4:01 PM on June 14, 2009 [1 favorite]


Does anyone know if there are downloadable versions of the lecture? The BBC player keeps killing my firefox.
posted by Trochanter at 4:13 PM on June 14, 2009


Or, as it was summed up nearly 2000 years ago, in Timothy 6:9-10 :

"But they that will be rich fall into temptation and a snare, and into many foolish and hurtful lusts, which drown men in destruction and perdition. For the love of money is a root of all evils: which while some coveted after, they have erred from the faith, and pierced themselves through with many sorrows."

Regardless of your position on religion, it's hard to deny that there's a hell of a lot of good common sense & insight in the Bible, particularly the New Testament. This one works well regardless of what your "faith" is - religion, rationality, humanity, money...

As a society, we've just classified, codified, and justified many exceptions to this in order to try and avoid believing that it applies to us in our particular circumstance.
posted by Pinback at 5:15 PM on June 14, 2009


Regardless of your position on religion, it's hard to deny that there's a hell of a lot of good common sense & insight in the Bible, particularly the New Testament.

Recall that Paul was writing at a time when capitalism (in a very, very primitive sense) was completely unregulated by anything other than greed, nepotism, and the threat of physical violence via mob. You might say that he was seeing the phenomenon at its most raw.
posted by AdamCSnider at 8:00 PM on June 14, 2009


"You didn't help pay for the infrastructure. You paid a fee for service. The investors paid for the infrastructure."

No, taxpayer money helped pay for it. Not all of it, of course. But at first, the NSF even registered domain names for free until 1995. The federal government as well as the states and local governments have thrown billions of dollars at building it out, in the form of direct grants, government loans, tax incentives and subsidies. And the last-mile, copper wire telephone infrastructure that helps bring DSL to many rural areas has been subsidized for quite a long time. The current regulatory climate has allowed a few very large players to emerge who dominate their markets through blatantly anti-competitive practices, rather than encourage smaller providers to compete over the same wires, who are at a significant disadvantage and have largely faded and been gobbled up.
posted by krinklyfig at 8:56 PM on June 14, 2009 [2 favorites]


"I don't doubt what you are saying but the reality is they don't generate an economic profit. They are terrible businesses that are worth less then the book value of their assets. Even if they as you said have manipulated the deregulation process."

You know, that's funny. Verizon, AT&T and Qwest all pay healthy dividends to stockholders. Clearly, the idea is that an entrenched, virtual monopoly with a wide moat is at least worth investing in as long as it throws money at the investors, because it's not going away.
posted by krinklyfig at 9:01 PM on June 14, 2009


GSK made $9B on $36B in sales last year, and that's counting $11B in their overhead -- over half of what we pay for pharmaceuticals is either overhead or profit. Anybody defending Big Pharma's profit margins is an rightwing freemarket fundamentalist ideologue or has a screw loose, but I repeat myself.

I find it kind of silly that you are classifying businesses as "wrong" or "right". The problem with morals is that it is inherently subjective: whereas you have a problem with something-- say, GSK's investors being able to profit from their investments-- that really is just your opinion. Unless laws are passed codifying the outlaw of a certain behavior, forcing your holier-than-thou beliefs upon others is just selfish.

We last saw this with the great number of advanced math degree holders being sucked into the Wall Street blackbox trading quant games this decade.

If markets were perfectly efficient, then your "unproductive" middle-men, speculators, market-makers etc. would not exist. But markets are not perfectly efficient, mispricings do exist, and stock market participants are in need of liquidity, all of which these traders provide and correct. Hence I would argue that these trading "games" provide a valuable service and do not deserve your derision.
posted by gushn at 9:28 PM on June 14, 2009


The problem with morals is that it is inherently subjective: whereas you have a problem with something-- say, GSK's investors being able to profit from their investments-- that really is just your opinion.

Are you honestly suggesting that just because morals are subjective that they cannot have any place in a debate over the way to run an economic system? I may be misunderstanding you, and if so I apologize, but to be quite frank if you toss out all subjective matters - well, the meaning of, and right to, private property, among other things, is a very subjective matter indeed.

Unless laws are passed codifying the outlaw of a certain behavior, forcing your holier-than-thou beliefs upon others is just selfish.

How does it suddenly become "unselfish" when you get the power of the state behind you? The passing of a law does not suddenly make forcing your beliefs upon others less selfish, it just means you're allowed to do it via the judicial system.
posted by AdamCSnider at 9:51 PM on June 14, 2009 [2 favorites]


The passing of a law does not suddenly make forcing your beliefs upon others less selfish, it just means you're allowed to do it via the judicial system.

My point is that it's really difficult to arbitrate morality because everyone has different concepts of it entirely. As someone mentioned above, there was a long debate on MeTa regarding the "morality" of posting all questions and no answers on Ask.Mefi. Unless the community explicitly underlines a certain behavior as a baseline law, preferences are really just preferences. Laws aren't perfect, but it is through law that we, as a collective, agree on what to agree on.
posted by gushn at 5:27 AM on June 15, 2009


Not really up on the history of telecommunications infrastructure in the US, huh? Might want to think about that when posting about it.
Correct me then. Last I checked the only subsidized part of a telecom company were the rural networks.

And why you not listening to what I am saying - They don't generate an economic profit. If you have oligopolistic power you should be able to generate profits they do not. They might suck at what they do but you cannot make a compelling argument they are overearning no matter what your issues might be with the prices they charge for things.

You know, that's funny. Verizon, AT&T and Qwest all pay healthy dividends to stockholders. Clearly, the idea is that an entrenched, virtual monopoly with a wide moat is at least worth investing in as long as it throws money at the investors, because it's not going away. Dividends are a function of how a company chooses to pay out earnings and allocate capital. They do not tell you if a company is generating an economic profit. In the case of T for example they made 33 billion in cash last year, but they spent 29 of it buying assets - yes they paid 9 billion in dividends and bought back 5 billion in stock, but they also had to raise 10 billion in debt to pay for it. That means they gave more of the total value of the firm to the debt holders then they held a year ago. It also tells you that they are currently overdistributing which is inevitably a bad thing

T is the definition of a company without a moat. Companies in competitive industries with high fixed costs and low variable costs are inevitably bad businesses because whenever there is any excess capacity it just too easy to cut prices. You don't need many players in businesses like this to destroy everyone's economics (see Civil Aviation where Boeing and Airbus are a duopoly but don't generate an economic profit through the cycle)

The classic example of a moat business was Newspaper pre-internet where you had huge fixed costs, de minimus variable costs and a natural monopoly.

Why were/are there investors, then? That's a hard question to answer as the world is filled with publicly traded companies that do not generate an economic profit over the long-term and probably never will. It comes down to there being very few board members willing to stand in a room and say "This business sucks lets sell it to the next sucker who comes around" Generally what happens is that eventually the firm goes bankrupt or continues to convince the world it can be a good business so they can continue to raise capital -either as debt or as equity - although if they do it with debt chances are they eventually go bankrupt. But of the choices you gave me I'd vote "people make suboptimal investment decisions"

Whether this is economic profit or just paying the debt service it took to acquire these spectrum licenses is not relevant to my point,

This is actually a very fair point - except that of T's 265 bil in assets, 47 (per the last 10q) were related to the capitalized value of the licenses. So real assets were 218. Net Income was 12 and change. According to the 10-K they don't amortize the licenses (which sounds shady to me and if I were considering investing in the company would think overstated earnings) but anyway 12/218 still implies a company that is not generating an economic profit.
posted by JPD at 5:52 AM on June 15, 2009 [1 favorite]


"Free-market" economics is inherently immoral; it is capitulation to greed - an attempt to channel greed to the public good. Adam Smith said as much. His vision was a system where everyone attempts to maximize their own well-being.

To a point, this works. But that point was crossed long ago.

In Adam Smith's time, most business was local. Smith held that a business owner's greed would be held in check because he had to take the welfare of his workers and customers into account, because they were his neighbors. This was the infamous "invisible hand" (which he mentioned exactly once).

The rise of multi-location and multi-national corporations destroyed that idea. They have no attachment or obligation to the welfare of their workers, because they are no longer neighbors. Workers are pawns; easily ignored, exploited and/or replaced.

The result is a race to the bottom for workers. An obvious example is the mass exodus of manufacturing jobs to Mexico, and then China, and now Vietnam.

Many people have seen this problem for what it is for over a hundred years. In the US, antitrust laws of the late nineteenth century and the labor movement of the thirties were (largely successful) attempts to instill some fairness into the system.

We have spent a great deal of the last thirty years turning our back on those improvements. I think it's obvious where that has led.
posted by Benny Andajetz at 7:03 AM on June 15, 2009 [4 favorites]


We used to hold certain basic human values, that were external to and independent of the markets. These values helped inform market valuations of goods and services. Now we look to the markets to tell us what we should value, increasingly defining our own core values, incestuously, in terms of their economic value. That recursion leads to non-linearity (like a feedback loop), which drives more and more chaotic market behaviors.
posted by saulgoodman at 7:50 AM on June 15, 2009 [4 favorites]


Recall that Paul was writing at a time when capitalism (in a very, very primitive sense) was completely unregulated by anything other than greed, nepotism, and the threat of physical violence via mob.

My, how we've grown!
posted by regicide is good for you at 11:00 AM on June 15, 2009 [1 favorite]


Saulgoodman, when my students ask me to define the condition of postmodernity in a sentence, I usually tell them something to the effect of what you've just written. Despite all the differing thoughts that have been written on the subject, one of the few constants in discussions of the postmodern period is that it represents capitalism's exhaustion of new frontiers for colonization, such that it marks capitalism's ouroboros-like inward turn. All of the cultural flotsam and jetsam variously described as "postmodern" is little more than the expression of this deeper economic paradigm shift.
posted by Lee Marvin at 12:25 PM on June 15, 2009 [3 favorites]


So real assets were 218

Well, they've been depreciated down to $100B, but what I am interested in is their wireless biz not their legacy fiber and residential infrastructure.

This is the segment that could be generating economic profits, at any rate they're at a pace to gross $50B in wireless sales this year, not bad for a $47B investment in spectrum.
posted by @troy at 2:53 PM on June 15, 2009


the cultural flotsam and jetsam variously described as "postmodern"

What an apt turn of phrase for it.
posted by saulgoodman at 7:39 PM on June 15, 2009 [1 favorite]


Well, they've been depreciated down to $100B, but what I am interested in is their wireless biz not their legacy fiber and residential infrastructure.

This is the segment that could be generating economic profits, at any rate they're at a pace to gross $50B in wireless sales this year, not bad for a $47B investment in spectrum.


Good lord man. Just because you hate the telephone monopolies (and I understand why - I have bug up my ass about cable) doesn't mean you can ignore the #'s

1) The investment in mobile telephony is more then the $47/bil in spectrum fees. There is also the capital cost of the equipment + other capitalized costs
2) The revenues they generate are irrelevant. What matters is profits. Why do you keep harping on sales?
3) That 217 number is the depreciated number. I have no idea idea where you are getting $100 from.
posted by JPD at 4:43 AM on June 17, 2009


The investment in mobile telephony is more then the $47/bil in spectrum fees. There is also the capital cost of the equipment + other capitalized costs

Sure, but the equivalent is buying a $5M plot of land that yields $5M in annual rents once built out. Capital depreciates but land by definition is eternal as long as their is a human need for the resource. (This is also why depreciating spectrum acquisition costs would be somewhat questionable to me -- AFAICT our needs for EM spectrum overpower the various technological advancements that have increased the carrying capacity).


The revenues they generate are irrelevant. What matters is profits. Why do you keep harping on sales?

I'd argue that economic profits for monopolists have a lower threshold than the corner grocery.
AT&T has over $70B of goodwill on its books, every dollar of which is an investment in eliminating competitors, The Borg-style. This is important because AFAICT the profit margins on new wireless biz must be immense and require active anti-competitive defenses at all costs.

That 217 number is the depreciated number.

Property, plant and equipment
219,769
Less: accumulated depreciation and amortization
(121,430 )
Property, Plant and Equipment – Net
98,339
posted by @troy at 9:18 AM on June 17, 2009


217 is total assets - intangibles associated with spectrum licenses. To just measure capital in a business as PP&E is incorrect. I'd buy total Tangible Capital which is more like 190 or so

I'd argue that economic profits for monopolists have a lower threshold than the corner grocery. I have no idea what you mean here. To argue something is acting as a monopolist they need to earn monopoly profits.

AT&T has over $70B of goodwill on its books, every dollar of which is an investment in eliminating competitors, The Borg-style. This is important because AFAICT the profit margins on new wireless biz must be immense and require active anti-competitive defenses at all costs.
Yes but as I tried to show even eliminating that goodwill associated with the licenses the company still doesn't earn an economic
Besides the fact that can't earn a return on that goodwill once again argues that it was actually them overpaying for assets rather then eliminating competition.

AFAICT the profit margins on new wireless biz Yes the marginal cost of new wireless business is virtually zero, however in order for a business to survive over the long-term and justifying reinvestment in the business Marginal revenue = Average Cost. Where average cost = costs + return on investment. Over the long-term the margin in a business is a function of its capital intensity. If a business is a pure labor outsourcing business w/ no working capital requirements then margins could trend towards zero, while something like a toll road needs 60%-70% margins just to survive.
posted by JPD at 10:14 AM on June 17, 2009


Sure, but the equivalent is buying a $5M plot of land that yields $5M in annual rents once built out.

No its the equivalent of buying a 5M plot of land, spending 5m to develop it and earning 500k a year off it.

The reason why depreciating makes sense to me is because evenutally somthing wil change that will render then worthless. Either technology will change or the government will revoke the licenses. Its a dangerous game to say something other then land has a permanent value.
posted by JPD at 10:17 AM on June 17, 2009


I have no idea what you mean here. To argue something is acting as a monopolist they need to earn monopoly profits.

I'm arguing that AT&T is, or at least defending its EPS with its monopolistic growth practices.

Even Rockefeller at his worst ran a tight ship and his margins were not /that/ immense or "abusive", just very, very well defended.

AT&T & Verizon have assembled a duopolistic market position that looks unassailable to me now. That they are "only" collecting $18B/qtr in operating income (depreciation backed out) isn't germane to my argument, which is that their actions are clearly (IMHO) anti-competitive and constitute a relatively profitable and long-term private rent-collection operation on what was the public commons of EM spectrum.

Phone bills technically don't have to be $100/mo. But clearly we consumers in our collective naivete are willing to pony up that much so the free market has structured itself to extract that amount from us, with a mixture of capital investment, regulatory investment, spectrum license purchases, and aggressive SG&A.

While not quite a "market failure", it certainly has been entertaining seeing AT&T reassemble itself T-1000-like.
posted by @troy at 10:49 AM on June 17, 2009


EPS alone is a meaningless statistic. That is the entire point of my argument above. I don't know why we keep having this argument.

You cannot look at margins alone either.

Its Return on Capital that matters not EPS.

You cannot look at EBITDA for a capital intense business either.

Its interesting you mention Rockefeller, because its another oligopolist that came up with the concept of a Dupont Analysis. its a bit flawed in that it focuses on ROE, but it is still a great way to learn about the interplay between sales/assets/margins/leverage/Returns.

If their actions were anti-competitive and they had pricing power then they would be earning a better return on capital - but the reality is that since 2003 the average return on invested capital for T is 6% and its not been improving.

I mean you keep arguing that its an abusive duopoly but the numbers just don't say that.
posted by JPD at 11:04 AM on June 17, 2009


JPD, if I understand what you are saying correctly, you are defining mono/duo-polies by the revenue that they generate, and thereby excluding the telcos. But that interpretation completely ignores the physical and political aspects of monopoly. There is definite political pressure to limit the profit of infrastructure monopolies. There is no way that modern informed society would stand for monopoly profit in an infrastructure organisation. There would be outrage, and the monopoly would be broken up, more thoroughly and irreversibly than the Baby Bells. OTH, if you can say "we're not making an economic profit, no-one else could do it cheaper", then you maintain the monopoly, you maintain control of the physical and intellectual assets and you maintain your position (as CEO) of such a monopoly as a person of influence, power and status in your society. It's a question of making enough to keep your job, and not so much as to be conspicuous, whilst all the time keeping any potential rivals from the opportunity to encroach on your territory.
posted by Jakey at 5:17 PM on June 17, 2009


It depends what you mean by revenues. My argument in the context of this thread is that revenue and margins in and of themselves are not meaningful in the context of asking if a business is abusing a non-competitive market situation.

From a microeconomic jargon perspective that in short run costs are fixed and revenues variable, then absolutely I am defining an oligopoly by revenue, or more precisely marginal revenue relative to marginal costs.

My argument for the telecom services companies not being anti-competitive oligopolies is based on the evidence that they do not generate economic profits. I would argue that the minimal marginal costs/high fixed costs nature of the business means that the benefit to one member of the oligopoly of cutting price to get volume means that none of the oligopolists can maximize revenues and therefore maximize return on capital. Hence we have a situation where returns on capital are below their cost of capital. Not behavior you would expect for a non competitive industry. Or put another way - If the members of the oligopoly can't trust one another to maintain pricing it becomes economically rational for all of them to cut price. The incremental margins on new volumes/decremental volumes on lost volumes are big enough that they are incented to drive price down. Therefore returns will always suck.

As to your second point? Sure maybe you could have a monopoly that doesn't abuse its monopoly position - but under anti-trust rules isn't that one of the tests? If you don't abuse your position there is nothing illegal about it.

I just doubt that anyone could win a spectrum auction limited to new entrants, make the investments, and generate a reasonable return. I've personally seen that story in the power generation business and it never works. Its just too crappy a business.
posted by JPD at 6:14 PM on June 17, 2009


From Sandel's final lecture, on a new politics of the common good (RTF):
Too great a gap between rich and poor undermines the solidarity that democratic citizenship requires. As inequality deepens, rich and poor live increasingly separate lives. The affluent send their children to private schools (or to public schools, as we call them in the United States) in wealthy suburbs, leaving urban public schools to the children of families who have no alternative. A similar trend leads to the withdrawal by the privileged from other public institutions and facilities. Private health clubs replace municipal recreation centres and swimming pools. Affluent residential communities hire private security guards and rely less on public police protection. A second or third car removes the need to rely on public transportation. And so on.

This trend has two bad effects: one fiscal, the other civic. First, public services deteriorate as those who no longer use them become less willing to support them with their taxes. Second, public institutions such as schools, parks, playgrounds and community centres cease to be places where citizens from different walks of life encounter one another. Institutions that once gathered people together and served as informal schools of civic virtue have become few and far between. The hollowing out of the public realm makes it difficult to cultivate the sense of community that democratic citizenship requires.

So rather than focus on access to private consumption, a politics of the common good would make the case for rebuilding the infrastructure of civic life; public schools to which rich and poor alike would want to send their children; public transportation systems reliable enough to attract commuters from all walks of life; public health clinics, playgrounds, parks, recreation centres, libraries and museums that would, ideally at least, draw people out of their gated communities and into the common spaces of a shared democratic citizenship.
posted by l33tpolicywonk at 8:25 PM on July 1, 2009


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